Now that one of John Paulson's hedge funds, Advantage Plus, is down 47% YTD, we'll see his true colors.

He has two choices, keep the fund open and earn no profits until he's made back those losses (which is considered the classy thing to do). Or shut Advantage Plus, and re-open it later.

In the past, some hedge fund managers have shut their funds after poor performance, only to re-launch later, with new funds that are wiped clean of the big losses that push their high pay, typically ~20% of their profits, off into the distant future. The pay structure of hedge funds provides somewhat of an incentive to do this, because hedge fund managers earn 20% of the profits that they make for investors. For example, if a manager returns -50%, they must return 100% before they're eligible to earn a profit again. (Of course, that's not impossible, especially not for Paulson, who has returned well over 100% before, in 2007, when one of his funds returned 590%.)

James Pallotta

An example of someone who's gone this route is James Pallotta, who earned his reputation as one of Paul Tudor Jones' top portfolio managers, and later founded Raptor Global, lost 20% in Raptor Global, shut it, and re-opened a new fund a couple of years later. Raptor Evolution, his new fund, offered investors who had lost 20% of their money in Raptor Global the chance to invest with him again and pay no fees until he earned profits back to his high watermark.

At his new fund, Pallotta found new investors. It might have been easier to find new investors for a new fund than a fund that was down 20%. Pallotta was only able to win back only some of his old investors.

Someone who's gone the other route is Larry Robbins. Glenview lost around 50% of their AUM in 2008, but Larry Robbins, the founder, kept the fund open. He's since earned back those losses and more. In 2009, Glenview returned ~82.7%, and in 2010, it returned 15.7% in Glenview Capital (12.64%-23.60% in all funds).

Who knows what Paulson will do. But there's a lot of reason to believe he'll keep it open. One, because both Paulson and the investors in Ad-Plus invested knowing that Advantage was among the riskiest of his funds, and was subject to big losses. So there might not be a lot of redemptions, which will play probably the biggest role in his decision whether or not to shut the fund (the deadline is October 31st, so we'll see). Also, because Paulson is still making billions off profits in his gold fund. And he's got a new batch of revenue coming in from the investment platforms at Morgan Stanley.

John Paulson should have retired, the lightning struck twice in the same but it becomes exponentially higher for the other strikes. His big bet? That banks would continue to mint money like before the crises.